Tax Beat hosts Brooks and Sarah continue a focus on strategic planning issues for companies that are onshoring, expanding and relocating operations. In this episode, the issue faced by many companies is finding funding sources to support their growth plans. One solution is the New Markets Tax Credit (NMTC) which facilitates private investment into low-income and targeted communities.
Topics discussed include:
- 3:00 – Overview of the New Markets Tax Credit program
- 6:02 – Role of TAG by Cherry Bekaert
- 7:24 – How companies benefit from NMTC backed financing
- 8:36 – Examples of funding for facilities and equipment
- 17:53 — How the NMTC Impacts Supply Chain Issues
View All Tax Beat Podcasts
HOST: Welcome to the Cherry Bekaert Tax Beat, a conversation about tax that matters.
BROOKS: Welcome to this edition of the Cherry Bekaert Tax Beat podcast. Today's topic is New Markets Tax Credit opportunities and supply chain realignment. We've been doing a series of these podcasts on supply chain issues. Previously, we've looked at sales and use tax considerations when companies are onshoring and relocating or expanding operations.
BROOKS: Today we'll take a deeper look at the financing opportunities available as companies realign their supply chains. Joining us in this conversation today, as always, is my trusty friend, Sarah McGregor. Say hello, Sarah.
SARAH MCGREGOR: Hello. It's good to be here.
BROOKS: And also Pete Byford, a leader with TAG by Cherry Bekaert. Pete, why don't you introduce yourself briefly?
PETE BYFORD: Thanks, Brooks and Sarah, for having me on. I am a trained tax attorney, although I don't practice law anymore. I spend my days working in New Markets Tax Credit finance out of our Greenville office, and we work with clients all over the country.
PETE BYFORD: I'm happy to be here and chat about it today.
BROOKS: Sarah McGregor, how's life treating you?
SARAH MCGREGOR: Life is good. It is February 1; tax season is in full swing. The snow has melted and things are moving forward, so I'm looking forward to talking about the New Markets Tax Credit today. It's been a good thing for some of our clients.
BROOKS: I can't let this moment pass without commenting on how great the NFL playoffs have been. Who do you want to win the Super Bowl, Sarah?
SARAH MCGREGOR: I have to go with Joe Burrow and the Cincinnati Bengals. It's such a cool story.
BROOKS: It is a cool story. All right. Let's talk about the New Markets Tax Credit. The program has been around for over 20 years. It facilitates essential investments in low-income communities and the businesses that support them.
BROOKS: The program issues federal tax credits to incentivize investment in these economically challenged areas. It helps drive lending activities and is a very popular, successful program. In September 2021, the Treasury announced $5 billion in credits awarded to over 100 community development entities to help fund projects.
BROOKS: Pete, give us your 20,000-foot view of the New Markets Tax Credit Program.
PETE BYFORD: The New Markets Tax Credit program is, in some ways, a misnomer. There is no particular form that a client fills out to take a credit on their return. Instead, it's a public-private financing mechanism.
PETE BYFORD: The federal government, through organizations we call community development entities or CDEs, authorizes those organizations to issue tax credits in exchange for capital invested by investors. Those investors are typically large banking corporations such as PNC, Truist, and Capital One.
PETE BYFORD: The banks buy the credits from the CDEs, who in turn inject capital into projects located in underserved communities across the country.
SARAH MCGREGOR: And the CDEs are putting that money in via direct loans or low-cost financing to private businesses.
PETE BYFORD: Those investors take the credit over a seven-year period, and during that period the projects receive capital on the front end in the form of a low- or no-interest loan. The projects use that capital for expansion, equipment, or other needs.
PETE BYFORD: At the end of seven years, the investors have received their tax credit benefit. The CDE has spurred community good, whether creating jobs, supporting services, or bringing goods to those communities. The program unwinds with the investor selling the loan back to the project for a nominal fee, often around $1,000.
SARAH MCGREGOR: How is the program tied to the local community as opposed to general financing?
PETE BYFORD: It's a highly competitive program. As Brooks said, $5 billion was issued recently to about 100 CDEs. When you consider the 50 states and territories and different focus areas such as health care, industry, and education, that project volume gets allocated quickly.
PETE BYFORD: CDEs pick projects located in the most distressed census tracts that will create the most community benefit, so the funding ties back to major impact in a local community.
SARAH MCGREGOR: How do you and TAG fit into this model? You're not one of the big banks.
PETE BYFORD: We work on all sides of the New Markets industry. We write applications for a number of CDEs and help those CDEs deploy capital. We work with large groups, such as the city of Greenville and the state of Alaska's development organizations, down to small community organizations like the city of Danville, Virginia.
PETE BYFORD: We also have a CDE where we invest in projects in North Carolina, South Carolina, Georgia, and Tennessee. Finally, my team represents projects seeking to access capital from the CDEs and the big bank investors.
BROOKS: This is fascinating. Let's tie it back to supply chain. How are New Markets Tax Credits effective as a financing vehicle for companies planning strategic moves around supply chain?
PETE BYFORD: One of the federal government's goals is to create jobs in low-income communities, and industrial areas are often lower-income communities. Industrial organizations frequently are located in qualifying census tracts.
PETE BYFORD: When companies are thinking about supply chain changes—onshoring, vertical integration, co-location, or adding manufacturing space—New Markets Tax Credits can bring capital to reduce the cost of constructing new facilities.
SARAH MCGREGOR: You've worked with several clients who built new facilities. Can you talk about a couple of those examples?
PETE BYFORD: We recently closed a project for a third-party real estate developer doing a build-to-suit, solar-powered, battery-backed manufacturing facility for electrified medium-duty equipment. Historically, equipment like forklifts is diesel-powered, but this facility produces battery-powered machines.
PETE BYFORD: The manufacturing facility has solar panels on the roof and a battery system that allows it to be effectively off the grid for day-to-day manufacturing. They would not have been able to afford the solar and battery systems without New Markets Tax Credits, which brought about $3 million of additional capital alongside traditional debt and equity.
SARAH MCGREGOR: That fits with what we're talking about—bringing new production and supplies to the U.S.
BROOKS: Pete, do companies call you during the decision-making process to see if they can use New Markets Tax Credits to make a supply chain move happen?
PETE BYFORD: Yes. Another example: we were in early at the table, Brooks, to help a multinational company with a facility in South Carolina making engineered hardwood flooring. They were spending $7 to $10 million a year trucking fiberboard from Alabama to South Carolina.
PETE BYFORD: They considered relocating or bringing in international manufacturers, but part of the consensus was they were willing to invest the capital to build an HDF plant in South Carolina because we could buy down the overall cost of that plant with tax credit equity.
BROOKS: Our examples have focused on facilities, but does the reach go further?
PETE BYFORD: It is much broader. The federal statute outlines a few prohibited uses, but otherwise CDEs and local communities determine what to invest in. You can finance machinery and equipment, working capital for expansion, inventory lines of credit, or acquisitions.
PETE BYFORD: While many visible projects are real estate, New Markets is a flexible financing tool.
SARAH MCGREGOR: What other examples of equipment or out-of-the-box financing have you seen?
PETE BYFORD: We're working with a company onshoring manufacturing of generic drugs. Machinery for injectable drugs is very expensive, and meeting FDA clean-room guidelines is challenging. We participated in financing the medical manufacturing equipment, leaving their real estate and other assets free and clear.
PETE BYFORD: We also financed equipment for a large industrial baking facility, addressing USDA and OSHA requirements for clean manufacturing. We helped pay for clean services equipment within a larger facility expansion.
SARAH MCGREGOR: It doesn't have to be just production. Distribution and resale also qualify.
PETE BYFORD: We've done a wide range of projects. We financed about 400,000 square feet of distribution space for a furniture company in North Carolina and sawmills in Alabama and Louisiana. We worked with a company in Memphis that needed automated packaging systems to replace manual box taping and jar packing.
PETE BYFORD: For businesses sending millions of units at a small profit per unit, automated packaging equipment can make a tremendous difference in profitability and help manage labor challenges.
SARAH MCGREGOR: Typically, what project size makes sense for New Markets financing?
PETE BYFORD: We typically work on projects with a capital spend in excess of $5 million. There are complexities and costs in the closing process, so on a net basis New Markets can bring 15% to 20% of your total capital spend, and you need scale to achieve efficiency.
SARAH MCGREGOR: What's the timeline like?
PETE BYFORD: In a perfect world, CDEs are filling out applications and want to know about projects that will be ready to spend money in the following year. From a consulting standpoint, once a project has an identified geographic location, we start marketing it to all CDEs that might be interested.
PETE BYFORD: Typically, New Markets wants to be in the conversation six to 18 months before groundbreaking or acquisition, so that lead time is a good planning window.
BROOKS: Supply chain is constantly a headline. How often is supply chain a topic of conversation with your clients?
PETE BYFORD: It's constant. Supply chain difficulties, construction costs, and delayed raw goods all drive companies to think about consolidation and expansion. Machinery and equipment costs, including steel, are higher, so New Markets is a way to attack those cost challenges.
SARAH MCGREGOR: In the engineered flooring example, it wasn't about offshoring; it was about hundreds of miles of transported goods making a difference.
PETE BYFORD: Right. The fiberboard is heavy, and trucking it 300 to 500 miles is expensive. They looked for a way to overcome that cost.
BROOKS: Pete, any final comments?
PETE BYFORD: We're working with dozens of clients at a time and are always happy to jump on a call to discuss supply chain issues and how New Markets might fit. We're glad to share how we might assist.
BROOKS: Sarah, anything on your end?
SARAH MCGREGOR: That's all for today.
BROOKS: From my side, this is a new angle on supply chain that the CPA world may not typically consider. You use tax credits to help finance projects rather than taking a credit on a return, but it's a way to use the tax system to address business-level supply chain issues.
SARAH MCGREGOR: It is a strategic planning question: How will we fund this? Can New Markets funding be a source as we move forward? If you're in strategic planning or drawing near, it's never too late until you sign all the deals to see if New Markets funding is available.
BROOKS: As always, Sarah said it better than I did. Thank you for listening to our discussion of the New Markets Tax Credit and supply chain. A quick disclaimer: we are not providing tax advice on this podcast. Please consult with your tax advisor, preferably a Cherry Bekaert advisor, about your specific tax issues or to discuss information from today's podcast.
BROOKS: Check the firm's website at CBH.com for the latest guidance and materials on this and other tax and business topics. This concludes today's podcast. Please like, share, and subscribe.
BROOKS: Thank you, Pete. Thank you, Sarah. Thank you, listeners, for spending your time with us. Let's call it a day and go forth in peace.
